Oftentimes potential borrowers find it difficult to obtain a loan or obtain credit. For instance, a bad credit history, no credit history, or unfavorable asset-to-debt ratios may make it very difficult for borrowers to obtain funds. Furthermore, major credit lenders tend to be much more cautious with lending presently in light of increasing numbers of losses due primarily to economic conditions.
Lending funds involves capital management and risk assessment. Risk varies based on a number of factors and conditions. Due to the nature of the business, major credit lenders generally evaluate the risk and approve or disapprove a lending request without actually “knowing” the individual and, indeed, usually without ever meeting or talking to the individual. Thus, if a potential borrower is evaluated as having an elevated risk, the credit lender generally has little choice other than to deny the loan application or institute some means to justify the risk such as a higher interest rate, adding or increasing payments, etc.
In contrast to loans between an individual and a major credit lender, loans made between parties personally known to each other create a certain dynamic with associated advantages. One advantage of personal lending is that the borrower often feels a personal obligation to repay the lender, in addition to the contractual obligation. Theoretically, this dynamic should substantially lower the risk of loss by taking advantage of sociological and psychological principles such as social norms and reciprocity.
Social norms define the behaviors within a group (such as a social network), i.e., the appropriate and inappropriate values, beliefs, attitudes and behaviors. Reciprocity refers to the psychological tendency to respond to a positive action with another positive action. Reciprocal actions are important to social psychology as they can help explain the maintenance of social norms.
Unfortunately, personal loans between parties are generally limited in the amount of funds capable of being loaned as compared to a major credit lender. Furthermore, borrowers often find it difficult to locate willing lenders.